Oil Price Slide May Hit Small Oil Companies' Spending Plans for 2012

HOUSTON (Dow Jones Newswires), Oct. 6, 2011

An unexpected drop in oil prices is beginning to give small and medium-sized oil companies pause, even though larger oil companies seem unfazed by it.

Prices for West Texas Intermediate oil, the benchmark for U.S. crude, which for most of 2011 has traded above $100 a barrel, prompting a drilling frenzy, have dropped to around $79 a barrel amid fears of a new dip into recession. The decline is already becoming an issue for relatively small energy companies, which depend more on the short-term cash flow they receive from high commodity prices to finance their future drilling plans. This week, small independent oil-and-gas producer Denbury Resources (DNR) said it plans to reduce its 2012 capital expenditures in order to protect its balance sheet amid concerns of lower cash flows. The Texas firm has a market capitalization of $4.4 billion.

Cimarex, a Colorado-based producer with a market cap of $4.7 billion, said last week that it could cut capital expenditures next year if U.S. crude prices dip below $80 a barrel.

"They are running the numbers and realizing that with oil prices below $80 a barrel the cash flow needed to maintain or increase spending may not be there next year," said Michael McAllister, an analyst at Sterne, Agee & Leach. "I expect more companies to follow suit."

The prospects of a double-dip recession, and of lower-than-expected oil prices, arise right at the moment when companies are deciding how much money they are going to spend next year. The U.S. Energy Information Administration trimmed in August its forecast for U.S. crude prices in 2012 to $101 per barrel from $103 per barrel, due to the weakening economy.

Small domestic U.S. oil-and-gas producers are more vulnerable than large global oil companies to the dip in oil prices than large producers because the oil they sell--mostly based on West Texas Intermediate crude--is cheaper than oil sold internationally; currently Brent crude, the benchmark for international oil contracts, is trading near $100 per barrel.

Their pullback on spending is likely to result in a drop in onshore drilling activity that could take the shine away of one of brightest sectors of the U.S. economy during the recession. Oil and gas drilling has propped up the fortunes of states like Oklahoma, Texas and Pennsylvania.

"A number of [small] producers are struggling with how best to set their 2012 capital budgets given the uncertainty," said Bill Herbert, an analyst with Simmons & Co. In order to preserve liquidity amid lower oil prices, independent oil-and-gas companies' 2012 capital expenditure budges are likely be 10% to 20% lower than this year, Herbert said.

On the other hand, large energy companies such as Exxon Mobil, Chevron and ConocoPhillips, which remain confident in the long-term value of oil, are seen as continuing to spend billions on new projects next year. They might even benefit from the a weakening in drilling activity as they may be able to secure lower oilfield service prices, said Phil Weiss, an analyst with Argus Research.

These companies have stashed billions of dollars to protect them from short-term bumps, and they budget using a wide, conservative price that generally trails market prices. "We take a long view of commodity prices," said Kurt Glaubitz, a Chevron spokesman.

Exxon, Chevron and Conoco declined to offer details about their next-year capital expenditure budget or price estimates. But unless Brent prices go below $60 a barrel and stay there for several months, capital expenditure for major oil companies is not going to be lower, said Fadel Gheit, an analyst with Oppenheimer & Co. Brent closed Wednesday up $2.94 to $102.73 a barrel on the ICE futures exchange.

Exxon--the world's largest publicly traded oil company by market value--is likely to increase its capital budget to $35 billion, up 3% from this year, while Chevron is seen as having a next-year capital expenditure of $27 billion, up 4% from this year, said Allen Good, an analyst with Morningstar Inc. ConocoPhillips said in July its 2012 capital expenditure budget is expected to be in the range of $14 billion to $15 billion, about $1 billion more than it expects to spend this year.

Large independent energy firms such as Anadarko Petroleum, Occidental Petroleum (OXY) and Apache are also seen as continuing the spending spree in order to achieve their ambitious production growth targets, Argus's Weiss said. These companies declined to comment on their 2012 capital expenditure plans.

Copyright (c) 2011 Dow Jones & Company, Inc.

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